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ECONOMIC
DEVELOPMENT
Brazil:
Latin America’s
Economic Leader
a) What Factors
(economic, political,
social and others) have
acted as a constraint to
the development of the
developing country of
your choice?
b) To what extent can free
trade and free markets
achieve economic
development?
c) Examine three strate-
gies which the country of
your choice can adopt to
achieve economic and
social development.
a) What Factors (economic, political, social and others) have acted as a constraint to the development of
the developing country of your choice?
Brazil has experienced unsustainable growth and development. Even though it has shown exceptional growth
figures a huge problem of inequality remains. Through the period of its economic growth however, it has
faced various constraints to development making it a unique economy. For example, the burden of debt re-
payment, corruption and the lack of infrastructure have all contributed to the unsustainable development.
One very important constraint to development, is the burden of debt repayment. Latin America experienced
a debt crisis in the mid-1980s, and Brazil accumulated a huge debt to the IMF during that period. Huge debts
for a government means that there are less funds to finance investment projects for infrastructure which
would bring about economic development. In addition other sectors such as education and healthcare have
also received budget cuts and therefore the potential of the economy will decrease. Unemployment will in-
crease and the standard of living will deteriorate. Brazil managed to repay its debt to the IMF in 2005 and is
now a creditor, but Brazil has accumulated a huge private debt to banks and various other financial institu-
tions. This accounted for 54.2% in 2011. The budget for 2013 which has been approved by the president sug-
gests ‘modern reforms for debt repayment’, as the debt acts as a constraint to social development. 42% of
the budget will be dedicated to repaying the debt and once again healthcare, education and investment proj-
ects will take the blow. The Long Run Aggregate Supply of the economy shifts to the left, and therefore po-
tential for growth both of GDP and GDP per capita have deteriorated, acting as a constraint to development.
Another major constraint, is the lack of proper infrastructure. According to the financial times “Rankings from
the World Economic Forum show Brazil as lagging far behind the BRICs countries on almost every aspect of
infrastructure” Brazil lacks a train network. Brazil’s airports are old, with renovations taking place in the 1970s,
and ports are too small for the volume of trade undertaken in Brazil. In addition telecommunication net-
works aren’t well established. This provides diseconomies of scales to firms operating in Brazil. It presents
higher costs to firms, making themmore inefficient, and allowing a smaller margin of profits for research and
development. According to the World Bank, it costs twice as much to import a container into Brazil com-
pared to other OECD countries and this is largely due to the limited space in ports. In addition to that, lack
of infrastructure makes Brazil less attractive to foreign companies and therefore, it can be projected that with
better infrastructure inward Foreign Direct Investment (FDI) flows would increase. This lack of improvement
in infrastructure has been caused by low productivity, “confusing management structure” and corruption ac-
cording to a study conducted by ‘Booz & Company’.
A third constraint to the development of Brazil, is corruption. The corruption index measures the perceived
level of corruption in a country. It takes values from 100 (clean) to 0 (very corrupt). In 2011, Brazil ranked 69th
with an index of 43 (according to transparency international). There have been recent outbreaks of scandals
in Brazil. Former government executives, a former chief of staff and a former treasurer have been jailed for
11 and 9 years respectively. This has shown that development has been made on this issue however there is
still a long way to go. These officials have embezzled money by promoting certain construction firms and
consulting agencies to win competitive tendering projects. This provided a strain on government finances, and
provided an inefficient allocation of resources. Also with the selection of these domestic firms, the transfer
of technology into Brazil by foreign manufacturing firms with a comparative advantage has been interrupted.
This means that domestic firms will not become more competitive and efficient in the long run. This table,
shows that transparency in developed countries (such as Germany) is higher and Brazil still has a long way to
go until it is considered to be a developed country.
A closely regulated business environment in Brazil has halted development. The Brazilian economy has a
banking system which has been closed off to foreign investment. In addition to that, Brazil has a high cost for
the setup for foreign firms, and this acts as a deterrent for FDI. Also, competitive tendering projects in Brazil
have been given to domestic firms as Brazil seems to protect domestic industries. Inward FDI in Brazil fell be-
tween the years 2008-2009 but as Brazil will host the FIFA World Cup in 2014 and the Olympics in 2016, FDI
has increased in 2010-2011 as many infrastructure projects are now undertaken by foreign firms. A study in
1997, by Easton and Walker, has found a correlation between economic freedom and economic growth. It has
been suggested that economic freedom is a determinant of the level of income. Deregulated markets have
performed better over the years and a highly regulated business environment in Brazil has seemed to harm
Brazil.
A final constraint on the Brazilian economy is the degradation of the environment. Brazil had one of the high-
est rates of deforestation in the world. Even so, it has the largest surface area of deforested land per year. In
addition, land is exploited for both illegal timbering and for the production of commodities such as soya. In
addition, due to inadequate government financing, waste management is not a priority in Brazil. This causes
many environmental problems, and in consequence cause health problems. With increased health problems
(such as respiratory problems), the labor force in an economy is affected. This puts a strain on healthcare in
the economy, but may also mean that more people are now unable to work. The productive potential of the
economy decreases, and the government needs to pay out more benefits.
This shifts LRAS to the left, and development as well as standard of living decrease.
Brazil, is one of the world’s greatest performers when looking at its economic indicators. However unequal
distribution of income and unsustainable growth seem to be a result of many factors that act as large con-
straints. It is shocking that 1/5 of the population of Rio de Janeiro live in favelas, as well as the stunning fig-
ures for drug use in the country. Brazil has certainly a long way to go before it can be considered a developed
country, and government policies removing these obstacles to growth would hugely aid in this effort. How-
ever Brazil certainly does have potential and is one of the most interesting economies in the world.
Winning Essay
by Andreas Damtsas,
7
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